We can assist in providing answers in the following areas:


Quantitative Risk Assessment

Quantitative Risk Assessment (QRA) is literally any assessment of risk that is quantified. We have been involved with QRA of a project's cost, its timeline, and Whole of Life cost. QRA is frequently used to determine the cost and time contingencies of a project.

We recommend that a QRA assessing the risks on a project should:

  1. Create a framework such as a cost model or project timeline in which the effect of uncertainty or unknowns in the cost and benefit drivers can be interrogated.
  2. Get a copy of the project's current risk register. The risk register may contain risks that are not otherwise captured in the cost model.
  3. Agree on the project's desired confidence interval - this is an estimate of the likelihood that a measured parameter will be represented by a measured parameter. Two common measures are in place they are 90% and 95%. A statistic value at a 90% confidence interval will be incorrect one time in ten. A statistic valid at a 95% confidence interval will be invalid one time in twenty. This measure can be any number between 0% and 100%. In its crudest form this is a measure of senior management's aversion to incorrectly advising their management of a cost estimate.
  4. Assemble a workshop consisting of the project team's decision makers, and experts from the business who have not been directly involved to-date with the project. The parties should represent all aspects of the project's life cycle.
  5. As part of the workshop, review the project's cost model and its timeline to ascertain that the models have an allowance for all the key modelling drivers.
  6. As part of the workshop determine the uncertainties in the model's inputs.
  7. Undertake a stochastic or Monte Carlo analysis. Run (iterate) the base cost model or timeline many times to ascertain statistics related to the using the model. Palisade provide a very capable tool for Monte Carlo analysis (here). This tool works as an add-in to Microsoft Excel.
  8. Discuss and agree management's appetite for elements that are unknown and that have not been identified by this process.

This modelling approach will produce the following metrics for a cost QRA:

Metric Description
original estimate An original estimate is provided by a vendor.
mean or unbiased or expected cost estimate Biases in the original estimate are identified, they are corrected for, generally resulting in an increase in the estimated price. The mean estimate is literally the expected cost. In the simulation it will have been averaged over perhaps thousands of simulations.
95th percentile or other agreed unlikely to exceed cost The mean cost has a statistical variation. A metric is created to provide an "unlikely to exceed" cost at a stated confidence interval. The difference between mean and the unlikely to exceed cost then becomes a contingency.

FOREX contingency

Often an allowance for foreign exchange movements requires the largest contingency. This is a specialist area and is not yet discussed on this site. In (New Zealand) government projects the forex contingency is often the largest contingency however it is also the shortest lived and one of the easier contingencies to manage. Government projects, purchase forward exchange cover once authority is held to proceed with a project. The forex contingency is required to cover exchange rate movements from when the project is proposed until authority is held for the project.